Forex Fundamentals
There are various releases (made public) of economic data from major currency countries and many for minor ones too; this data is what makes the FX markets so transparent. They are released on a regular basis, mostly monthly, some others weekly or quarterly. There is no niche know how or privileged information or exceptional analysis needed. It’s all out in the open and readily available from various sources. Economic data is released by government agencies or private institutions that need to look after their reputations and are considered very reliable.
Trading Forex on data
Economic data can affect the direction of a currency depending not only on what type of data, as in good or bad, but also if it was an expected level or not. Unexpected levels can add new momentum to the ongoing trend or reverse the current trend. We will look at the major data releases for the US dollar, which are the most followed, but as most of the data that is released in the US is also released by other countries it is also possible to trade that data in the same way. We will examine what the data means for the economy and what would be the expected reaction in the Forex market.
Non-Farm Payrolls
This is the most important data release for the US. It is released once a month on the first Friday of each month at 8.30a.m. New York time. It’s considered important because it can create a lot of volatility, i.e. can cause the market to react by going up or down. What is it exactly? This data tells us how many jobs have been created in all industries excluding Agriculture. The higher the number is, the more bullish for the economy. Bullish here means an expanding economy that should lead to higher GDP and eventually to higher interest rates, which in turn will lead to a higher or stronger currency. How can traders know if the figures is higher or lower than expected? This is the most important factor when trading on the back of data, the forecast or consensus for the release. There are many sources that have this data available and some that update the data as it is released to the public. Many newspapers and websites will publish forecasts – but many brokers have this information too, IG for example, have an in-depth event calendar that will list the expected events, note their likely impact and list the estimated forecast, the last forecast (for comparison) and once released, the actual figures. Alerts can be setup for specific events too.
An example of Forex data news
So let’s say you are waiting for Non-Farm Payrolls (NFP) to be released, with a view to trade EUR/USD on the back of it. The expected number is 270k and the actual number released is 285k. This is a larger than expected number (roughly 5.5% larger) meaning that the economy is expanding at a faster rate than forecast. If this is the case then the USD should also be at a higher price to reflect the macro-economic data. A situation of this kind should see, and almost always will see, the USD rise against other currencies, meaning a pre data price of 1.0950 for example, will rise after the release. It can easily gain 100 pips when there is a large enough difference from the expected number, possibly reaching 1.1050. It’s important to note that if the data does not reflect the overall medium term trend of the currency pair, the reaction to the data release may be short lived.
Unemployment Rate
NFP are also released with other data, the main one being the Unemployment Rate (UR). As is often the case more than one set of figures are released at the same time, but we will concentrate on the ones that create the most volatility in the market. The UR is very easy to understand and is often heard on the daily news. Here a higher than expected number would indicate an economy that is not expanding as fast or is shrinking faster than expected, in both cases it is negative for the economy and negative for the USD. As this number is released together with NFP it acts as a confirmation, a high NFP number should be accompanied by a lower or stable UR number.
ISM Manufacturing PMI
This data is also released together with others, usually on the first day of the month. ISM is the Institute for Supply Management and PMI stands for Purchasing Managers Index. It is a strong indicator of economic activity in the manufacturing industry, which is a very important part of total GDP. A stronger than expected number will indicate that the economy is expanding faster than forecast and therefore the USD should rise against other currencies.
Retail Sales and Retail Sales Ex Auto
These figures are released monthly around the middle of the month for activity from the previous calendar month. It is a measure of the variation of retail goods sales, the Ex Auto number tells us how much of that change is due to non-Auto sales, which in reality translates to how much of the increase or decrease is due to Auto, which is such a big industry. Increases in Retail Sales numbers mean an expanding economy, as people are buying more goods and companies will have to manufacture those goods to meet the demand. Therefore a higher than expected number on release will push USD higher against other currencies.